Partners and partnership law

Question 1

The Sole Trader (what it is)

Answer 1

carries on business on their own account without forcing any special structure - sole trader may need to register VAT or comply with other regulations/licensing requirements.

A sole trader is:

• owns their own assets in business
• personally liable for debts incurred
• can declare bankruptcy of business
• takes the profits
• faces unlimited personal liability

Question 2

Pros & Cons of Sole Trader

Answer 2

Cons:

• risk of facing unlimited personal liability
• difficulty in raising finance (needs to take loan and use own personal assets as security)

Pros:

• relatively straightforward and inexpensive to set up
• The sole trader keeps control of the venture

Question 3

The Partnership (ordinary) - S.4(1) partnership act 1980

Answer 3

• two or more persons carrying on a business - S.45 defines business
• shares profits and losses
• no registration/formalities required
• Law commission suggested reform of law but still no, however there are different types of partnerships available

Question 4

S.1(2) PA 1980 - relationship between members of a registered company doesn’t constitute a partnership (case)

Answer 4

this maintains the distinction between partnerships and firms as distinct legal structures.

Dutia v Geldof: not ever economic cooperation creates a partnership; parties need to be carrying on business together with an express or implied agreement to create a partnership. - if no express agreement court must look at entire set of facts.

Question 5

Forming a partnership (S.24 1980 act) (case)

Answer 5

works as a default set of terms which parties are free to adopt or vary as they wish.

Stekel v Ellice; sole practitioner entered into agreement with S to become “salaried partner”, with view to becoming “full partner” later - accountant took all capital and bore all losses but S still found to be partner, because:

• parties had expressly recited intention to enter into partnership
• in event of practitioners death, S would take over practice though obliged to pay P’s capital to P’s executors
• in certain events either could dissolve partnership (S.2 PA 1980)
• Arbitrator clause: contained express power to arbitrator to dissolve the practice (so in dispute of dissolution arbitrator provided)

Question 6

Informal & Deemed partnerships - when they may arise

Answer 6

• can arise when there is agreement to share profits
• may not matter if one person has no direct involvement with business
• advisable not to agree to lend money to a friend/family member to help them with business venture in return for sharing profits as it may be deemed that the financial help constitutes a partnership
• Dutia v Geldof; merely helping raise funds is not deemed partnership but if claimant encouraged to star work under the LLP and later work longer hours than the agreement provided for, by way of assurance that everyone was in the same boat then partnership may be inferred
• Alchom v Lalice; a potential co-ventruer in a nightclub project did not establish entitlement to a share in venture by means of a non-financial contribution where there was no evidence of any concluded agreement between himself and the purchasers of the lease.
• S.2 sets out detail rules and presumptions for determining a partnership

Question 7

Moss v Elphick

Answer 7

a right to dissolve a partnership by giving notice may be inapplicable where other agreements have been put in place - i.e. dissolution by mutual agreement.

Question 8

Legal nature of a partnership

Answer 8

• partnership does not have legal personality separate of its members
• members collectively own assets and share profits - can use trustees to hold some or all firm’s assets on their behalf
• firm assets are formally separate from partner’s personal assets and separation important to firm’s creditors in event of insolvency
• each partner is personally liable in full to any creditor or business unless creditor has agreed to limit their liability e.g. if partner has to pay creditor they can seek contribution from other partners on the basis that they share profits (likely to go for those with bigger pockets so this partner looks for contribution from other partners if they can)
• S.5; provides every partner is an agent of firm and of their other partners for purpose of conducting firm’s business (“mutual agency”) - so partner can incur debts and obligations which every partner may be liable for.

Question 9

External relations of partnership (agency law - binding partners)

Answer 9

partners can bind other partners to a contractual obligation with outsider provided the obligation is within the scope of partner’s authority.

S.9 = partners jointly and severally liable for the obligation

if a 3rd party wishes to enforce contract made by an agent against agent’s principal they have to prove they have either actual authority or apparent authority.

Question 10

Actual authority

Answer 10

Depends of actual relationship/dealings between principal and agent (rights conferred on agent to enter into contracts on principal’s behalf) which are private so apparent authority easier to prove.

implied actual authority: appointing A to a position/office that usually gives holder authority to act on appointer’s behalf

where no provisions/agreements made - S.5 applies = every partner has actual authority in business and scope depends on nature of firm’s business

Question 11

Apparent Authority

Answer 11

presumed from external relationship between principal and agent

P is liable to 3rd party because of representation made by them showing A has authority to make a contract in Question on P’s behalf - P can make this representation to the world or directly to 3rd party = this apparent authority can only be altered by changing representation

Partner’s apparent authority can only be cut down by showing otherwise to 3rd party or if no reasonable basis for presuming representation.

Question 12

No apparent or actual authority

Answer 12

principal can ratify contract to validate it otherwise 3rd party has no right to enforce contract - 3rd party can still have remedy against agent personally (same for principal against agent)

Question 13

S.10, 11 and 12 1980 Act

Answer 13

S.10: provides that partners are vicariously liable for the wrongful act/omission of another partner acting in ordinary course of business of the firm - Dubai Aluminium v Salaam; used to apply to common law torts but now applies to equitable wrongs also (e.g. breach of trust)

S.11; provides partners are liable for misapplication of money or property received in course of firm’s business

S.12; partners are jointly and severably liable

Question 14

S.25 & 35 1980 Act (case)

Answer 14

S.25; partner cannot expel another partner through majority voting (only works in ordinary matters concerning firms business)

S.35; partner may apply to court for dissolution of partnership in various circumstances - Goldstein v Bishop; S.35(d) allowed for partnership to be dissolved because of partner’s persistent breach of partnership agreement

Question 15

Reform of partnerships (Dept. for Business, Innovation & Skills)

Answer 15

• partnerships should have separate legal personality
• partnerships should be able to issue “floating charges” over firm’s assets as security

DBIS has indicated it has no appetite to embark on a major reform of law and prospects for implementing these reforms seem remote

BUT, DBIS embarked on process of reform regulating limited partnerships and these took effect in 2009 = LLP has removed some of urgency for general reform.

Question 16

The Limited Partnership (enforced under LPA 1907)

Answer 16

brought in to provide some relief from unlimited liability of general partnership and legislative reform of 2009 has introduced some reforms of LLPs

Question 17

similarities between partnership & limited partnership

Answer 17

• must be 2 or more persons involved/carrying on business with view of profit
• firm does not have separate legal personality
• any partnership agreement does not need to be filed with company house website

Question 18

Differences between LP’s & General partnerships (case)

Answer 18

• one or more limited partners may enjoy limited liability, though there must be at least one general partner who will have unlimited liability for firm’s debts and liabilities
• the firm must be register though delivery of a statement of particulars to the registrar of companies at companies house, who will issue certificate of registration
• Limited partners will not benefit from limited liability until this certificate has been issued; Bank of Beirut v Prince El-Hashemite = fraud cannot remove certificate once issued - S.8(c) LPA 1907 - cannot remove LP from companies house once issued - LPs been fraudulently registered without authority/knowledge of LP’s general partners.
• limited partners must not participate in management of firm’s business and will lose their limited liability any time they do participate (“sleeping partners”) they will also have unlimited liability for any loss they incur
• limited partnership formed after 2009 must have LP at end of their name

Question 19

Limited liability in practice (what they used for/who prefers them)

Answer 19

• popular with private equity funds and hedge funds as an investment vehicle and as a structure for joint ventures.
• they have flexibility and privacy of general partnership and so seen as tax efficient since firm does not have separate legal existence

Question 20

The limited liability partnership (Limited Liability Partnership Act 2000)

Answer 20

came into force after growing concerns of professional negligence claims; aim to combine benefits of legal personality and limited liability with organisational flexibility and tax treatment of partnerships

Question 21

Key characteristics of a LLP

Answer 21

• has own legal personality and so its members are not liable for debts and liabilities of the firm unless some other legal basis of their liability
• LLPs have become a popular structure for professional fims
• 1980 Act does not apply to LLPs, but LLP does retain organisational flexibility and tax position of general P so everyone is an agent of it and can bind the firm of obligations/incur debts and other liabilities when acting in scope of business.
• no obligation to file agreement with companies house website
• provision of 2000 act and supplementary regulations apply in default of an agreement (inc. a provision that all members are entitled to participate in management of firm
• if total membership falls below 2 it may be removed from the register and, after 6 months, it loses its limited liability status and any remaining members face personal liability for subsequent losses
• good for a partner who has more investment/personal assets than other partners as LLP can mean all partners equally liable to creditors and/or 3rd parties.